Centre American Select Equity Fund
Large Capitalization Stock Focused Concentrated Portfolio
Focus on Risk Adjusted Returns Actively Managed to Seek Long Term Alpha
Investment Objective: The Fund seeks to generate long-term capital growth Investment Strategy Highlights: Invests in a diversified portfolio of large capitalization American blue chip
equity securities High conviction investment ideas What we believe are best 45 to 75 stocks of
American companies concentrated in the top 20 names Bottom up fundamental stock selection process driven by Economic Value
Added (EVA) investment philosophy Focus on delivering risk adjusted returns and positive upside vs. downside
market capture ratio over long-term Stock selection is combined with quantitative portfolio construction and risk
management for optimal stock position sizing within sector/industry emphasis and risk parameters The Fund may employ hedges and other capital protective strategies when
deemed tactically appropriate a risk managed growth fund
Fund Profile: Summary
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Fund Profile: Characteristics
Source: Morningstar as of 30-Jun-2015
Market Cap Definitions
Giant > $40 billion
Large $8 billion - $40 billion
Mid $1 billion - $8 billion
Small $500 million - $1 billion
Micro < $500 million
Source: Centre Asset Management, LLC. As of 30-Jun-2015 3
Style: US Large Cap Valuation Sensitive Growth Sector Allocation
Subject to change
Fund Profile: Fund Manager
James A. Abate, MBA, CPA, CFA, is the Managing Director and Chief Investment Officer of Centre Asset Management and is responsible for the firms American Select Equity and Real Return strategies. Prior to founding Centre, Mr. Abate was US Investment Director for GAM. Previously, Mr. Abate served as Managing Director and Fund Manager at Credit Suisse Asset Management responsible for the US Select Equity strategy and the firms global sector funds. Previously, he was a Manager in Price Waterhouse's Valuation/Corporate Finance Group and served as a commissioned officer in the US Army. Mr. Abate is a contributing author to several John Wiley published books: Applied Equity Valuation, Focus on Value, Short Selling, and The Theory and Practice of Investment Management; as well as published research papers in institutional investor journals, some of which were adopted by the CFA Institute candidate study programs.
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Investment Process: EVA-driven Stock Selection
Excess Returns Relative to Capital Growth Rate ("Economically" Profitable Reinvestment)
Exc
ess R
etur
n on
Inve
sted
Cap
ital (
Ope
ratin
g R
etur
n Le
ss R
equi
red
Ret
urn)
-35%
-
30%
-
25%
-20%
-
15%
-
10%
-
5%
0%
5
%
1
0%
15
%
20
%
25
%
30%
3
5%
QUADRANT I (- +) QUADRANT II (+ +) "Dead Money" "Stable or High Growth"
AVOID POTENTIAL BUY
Underinvestment highlights few opportunities for creating shareholder wealth or short-termism by management at the expense of long-term
investment for growth
Shareholder wealth is maximized by internal growth and related, strategic acquisitions
Gilead Colgate Intl Flavors CR Bard Chipotle Apple Starbucks Google
QUADRANT IV(- -) QUADRANT III (+ -) "Wise Contraction or Cyclical Restructuring" "Empire Building"
POTENTIAL BUY AVOID
Stock repurchases, dividends, debt pay-down and other measures of wise contraction (asset sales & restructuring) create shareholder wealth
Inefficient growth and wealth destruction - excessive capital spending at cycle peak, empire building M&A transactions - non-
related, non-strategic or overpriced acquisitions
ADM Lowes Kimberly Clark Texas Instruments Target Vulcan Materials
-35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35%
Invested Capital Growth Rate
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Investment Process: Portfolio Strategy & Management
How does our Quadrant emphasis pragmatically change under different environments and is this cycle a normal one?
ENVIRONMENT STAGES
Economic Stage Slowdown Recession Early Recovery Full recovery
Consumer Expectations Falling Reviving Rising Declining
Industrial Production Falling Bottoming Out Rising Flat
Interest Rates Peaking Falling Bottoming Out Rising
Yield Curve Flat/Inverted Normal Normal (Steep) Flattening Out
TOP RIGHT (++) ~70% ~60% ~40% ~80%
BOTTOM LEFT (--) ~30% ~40% ~60% ~20%
Portfolio Concentration of Blue-Chip, Quality Stocks (Quadrant II, ++) with Increasing Allocation to Cyclical Restructuring Stock (Quadrants IV, --)
Portfolio Barbelled Between Blue-Chip, Quality Stocks (Quadrant II, ++) and Highest (>50%) Allocation to Cyclical Restructuring Stocks (Quadrant IV, --)
Portfolio Concentration of Blue-Chip, Quality Stocks (Quadrant II, ++) with Decreasing Allocation to Cyclical Restructuring Stock (Quadrants IV, --)
Source: Centre Asset Management, LLC. The diagram above is a generalization of the investment process. Actual portfolio composition might be different 6
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Sources of Stock Market Total Returns
Dividend Yield Earnings Growth
Sales Growth Efficiency
Profit Margin
Asset Turnover
Re-Rating (Change in
P/E Multiple)
Interest Rates/ Inflation
Risk Appetite (Equity Risk
Premium)
Net Share Repurchases
Key Observations on Pricing of Risk & Future Growth Despite the recent correction, we struggle to see what driver will move market indexes
as a whole higher from here
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Prepare for the Unexpected in Stock Markets: The Herd is conditioned and operating using deductive reasoning and statistics (not inductive common sense) based on recent history that may prove at least partially WRONG; were in uncharted territory. The *Herds Premises and (what we believe are faulty) Conclusions 1. Stock markets have, on average, gone up another 33% when prior rate hike cycle have
started so the Federal Reserve hiking rates is a good signal for future stock returns 2. The economy and profits cycle are accelerating and finally ready to reach escape
velocity in the second half of 2015 3. A recession has never happened when the yield curve was positive like it is now 4. If the Federal Reserve raises short-term interest rates, investors may want to buy
Financials as they could benefit as they have in the past 5. Stock prices are inexpensive given the S&P 500s P/E ratio is below the long-term 25
year average 6. The current technology & social media revolution could lead to advances in
productivity and efficiency advances for companies as well as real wage gains for employees
7. Strong housing data is a leading indicator of consumer optimism and future spending 8. Stock buybacks should support further EPS gains and equity prices
*Herd: Behavior that ensues when a critical mass of investors mimics the behavior of other investors becausewell, just because. Herds can chase prices up (think dot-com stocks in the 1990s) as well as down (think 2008-09). Source: Wall Street Journal
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Date of 1st hike in target Federal Funds rate
S&P 500 Index advance from 1st rate hike
# of Months to market top
# of Months to economic peak (ISM Index)
Sign of economic contraction (ISM Index
Source: Centre Asset Management, LLC & Intrinsic Research as of 1 September 2015
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The Economic & Profits Cycle is Decelerating, not Accelerating ISM Index and S&P 500 Cash Flow Operating Margins
[Shaded Areas Highlight Recessions]
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Japan has seen Numerous Recessions Although its Yield Curve has not Inverted since 1991 prelude for the U.S.
During times of suppressed low short term interest rates, the historical predictive power of the yield curve seems to fall apart for developed economies
[Shaded Areas Highlight Recessions in Japan]
*JGB stands for Japanese government bond
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Financials Now Seem Less Sensitive to the Yield Curve After Repeal of Glass-Steagall, Net Interest Margins are Less Dependent on Spread
Between Long and Short Term Interest Rates; Rate Risk Replaced by Credit Risk [Shaded Areas Highlight Recessions]
Source: Centre Asset Management, LLC & Intrinsic Research as of 1 September 2015
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P/Es for the S&P 500 Index Give a False Sense of Value Valuation Multiples Based on Sales, not Earnings, Rival the Peak in early 2000 and are
Consistent with Warning-Flashing Normalized P/E Indicators [Shaded Areas Highlight Recessions]
Source: Centre Asset Management, LLC & Intrinsic Research as of 1 September 2015
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Elevated Valuation Multiples Are Vulnerable to De-Rate Lower Drop in Operating Margins, Deceleration in Sales Growth, and Reduced Share
Repurchases Potentially Indicate Earnings (E) and Valuations at Risk [Shaded Areas Highlight Recessio
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